'Going local' in Asia has risks and - maybe -- rewards

Investing locally is not always easy, and is not for every investor

LisaTwaronite

TOKYO (MarketWatch) - The old Chinese curse "May you live in interesting times" can certainly apply when someone outside a particular Asian country decides to invest directly in a local market there.

Therefore, the first question any investor should ask before attempting it is, why?

Some people have personal reasons for a direct approach, such as family members in residence, a second home or a plan to eventually retire abroad. Others might just want to try their hand at something a little different.

Whatever their reasons, all investors need to ask themselves if they're ready to face all the "interesting" challenges of macroeconomic and currency risks, as well as those posed by ever-shifting local regulations and tax rules.

Local positions expose holders to foreign exchange fluctuations, if they plan to repatriate any gains into their home currency - but this could work the other way, too, with an opportunity to enhance returns if the forex market moves their way.

"There are some key sectors and countries to consider, but each investor has different requirements and a different attitude for risk -- so there isn't a 'one-size-fits-all' recommendation," said James Weir, co-manager of the Guinness Atkinson Asia portfolios.

Local trading can allow investors to take positions in shares that aren't listed on U.S. exchanges, and don't have American depositary receipts. Some might not even be included in any exchange-traded fund holdings.

For instance, it's easy for an investor outside of Japan to get exposure to internationally known companies including Toyota Motor Corp.
TM, +0.30%
(7203) and Sony Corp.
SNE, -1.38%
(6758).

But it's not as easy to buy into companies like Kura Corp. (2695), a sushi restaurant chain whose first-half net income more than doubled, and whose shares are up more than 20% year-to-date.

The same story is repeated in other markets across the region.

Investors can buy into India using an ETF like the WisdomTree India Earnings Fund
EPI, +0.52%
-- or they can take a stake in a company like Jain Irrigation Systems, which specializes in micro irrigation systems and is up more than 30% year to date, or in Andhra Bank, up more than 25%.

Policy risks

If they're not on the ground, though, investors risk being blindsided by sudden regulatory, monetary or fiscal policy moves, which sometimes take even seasoned institutional investors by surprise.

For instance, investors are still sorting out the long-term investment implications of the Bank of Korea's recent move to limit forward currency trading, and new requirements from Indonesia's central bank for its bill sales. India, meanwhile, could change its capital gains tax rules.

"Just days after BOK put limits on forward currency trading in order to limit volatility in capital inflows, other countries in Asia have taken some steps that could also affect capital flows. Bank Indonesia announced changes in its T-bill market while India is floating possible changes to how the capital gains tax is applied to share purchases and sales," said Win Thin, a strategist at Brown Brothers Harriman.

"At first blush, these measures are not particularly worrisome, but we repeat our concerns that introducing or discussing such measures at a time of great uncertainty and fear in global markets may end up being more destabilizing than stabilizing," he said in a recent note to clients.

For those who are still undaunted by the risks and have no local contacts, the best place to start is the Web site of a specific country's stock exchange and its local securities' dealers associations.

Countries that welcome foreign investment often have English-capable staff ready to field investor calls during Asian business hours.

Getting access to certain markets, such as China, is tricky even for institutional investors, but most have figured out ways to work within any given system.

"For institutional investors, generally most markets in Asia are directly accessible with some exceptions like China A shares where there are quotas for qualified foreigners, but exposure can be achieved via promissory notes with investment banks with the quotas or via ETFs," said SooHai Lim, senior investment manager at Baring Asset Management in Hong Kong.

Individual investors can also access institutional trading platforms through some private asset managers.

"Many U.S. investors are not able to get easy access to the Chinese or Vietnamese markets, for example. As an investment advisor, we can use institutional platforms," Alice Chan, executive director at Thornton Global Wealth Management.

"If our customers prefer to trade stocks, we can customize a portfolio for them, with everything from stocks to options to fund-of-funds, and even exposure to less-liquid areas and a currency-hedged portion if they want, and give them daily research as a medium- to long-term advisor."

In the long run, investors have a better chance of stable returns if they spread their fund allocations among different markets instead of concentrating on just one or two.

Keeping on top of developments in multiple countries can get complicated -- but with lots of planning and a little luck, it might end up being "interesting" in a way the Chinese curse didn't mean.

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